A Senate committee has been urged to consider legislation that would allow the National Flood Insurance Program (NFIP) to cede more risk to private reinsurance markets and to allow it “explicit access” to more “securities vehicles”, which could help the flood catastrophe bond cause.
Ever since FEMA secured just over $1 billion of reinsurance protection from a panel of 25 traditional reinsurers at the January reinsurance renewal the expectation has been that it would return to the market and seek to do more.
FEMA itself has said that it aims to renew its reinsurance in January 2018 and ensure that it secures coverage on a multi-year basis in future, as it sees the benefits of locking in rates and terms for longer than just the single year its initial 2017 reinsurance program runs for.
Naturally there have been calls for the capital market to play a role in the NFIP reinsurance arrangements, with flood catastrophe bonds mooted and the collateralized reinsurance markets and ILS fund managers all ready to play a role if FEMA’s risk transfer needs increase.
Legislators in the U.S. continue to call for reforms to enable FEMA to take greater advantage of reinsurance and risk transfer as well, with the most recent example being from the U.S. Senator for Nevada, Dean Heller, who urged the legislative to consider laws that would allow the NFIP to cede more of its flood risk to global reinsurers.
“I would request that you consider legislation that would annually yield a portion of the NFIP’s risk to private reinsurers,” Heller wrote in a letter to the Chair of a Senate committee, as he called for more flood risk to be transferred to the private market instead of being left as a potential burden for taxpayers to shoulder.
Perhaps most interestingly though, Heller called for the NFIP to be given “explicit access to more securities vehicles that could be used by the NFIP to capture more funding from the private sector. ”
Now while that could be a way for securing funding alone, a much more effective use of securities vehicles that would enable the NFIP to improve its overall funding while also sharing flood risk with private markets would, of course, be through issuing catastrophe bonds.
If the NFIP’s access to securities structures was enshrined in law it could make any future use of catastrophe bonds as a way to source reinsurance capacity to back flood risk more likely. While Heller is likely considering U.S. securities law here, it could be a positive step to get both FEMA and legislators buy-in on using securitization for insurance risk transfer as well.
A representative of FEMA recently called the initial flood reinsurance purchase a “cornerstone placement that FEMA will be building upon going forwards.”
If catastrophe bonds could be thrown into the mix, through enhancing the NFIP’s access to securities markets somehow, it would enable the program to be lengthened and the counterparties involved to become much more diverse, which can only be a good thing in the mission to reduce the flood risk burden to taxpayers.
The capital market could be capable of helping FEMA considerably increase the size of its reinsurance program for 2018, as flood risk in cat bond form would offer an attractive diversifying opportunity to some investors and would no doubt be well-received as a result.
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